The Panama Papers: Guidance for Tax Counsel to Mitigate Client



The Panama Papers: Guidance for Tax Counsel to Mitigate Client
Presenting a live 90-minute webinar with interactive Q&A
The Panama Papers:
Guidance for Tax Counsel to Mitigate
Client Tax Penalties and Criminal Prosecution
Conducting Account Reviews to Identify Legal Exposures, Designing Disclosure Strategy, Leveraging OVDP
TUESDAY, JULY 26, 2016
1pm Eastern
12pm Central | 11am Mountain
10am Pacific
Today’s faculty features:
Matthew D. Lee, Partner, Fox Rothschild, Philadelphia
Jeffrey M. Rosenfeld, Blank Rome, Philadelphia
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The Panama Papers: Guidance for Tax
Counsel to Mitigate Client Tax Penalties
and Criminal Prosecution
July 26, 2016
Presented by:
Matthew D. Lee
Fox Rothschild LLP
Jeffrey M. Rosenfeld
Blank Rome LLP
Matthew D. Lee
Matthew D. Lee
Fox Rothschild LLP
[email protected]
Matthew D. Lee is a former U.S. Department of Justice trial attorney who
concentrates his practice on all aspects of white collar criminal defense and federal
tax controversies. He has extensive experience in advising clients on issues regarding
foreign bank account reporting (FBAR) obligations, the Foreign Account Tax
Compliance Act (FATCA), and the Internal Revenue Service’s 2009 Offshore Voluntary
Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative, and 2012 Offshore
Voluntary Disclosure Program. He has represented hundreds of U.S. taxpayers with
undisclosed foreign bank accounts. Mr. Lee has published numerous articles
regarding the IRS voluntary disclosure programs and FBAR and FATCA reporting
obligations and speaks frequently on these topics.
He has also represented clients in all stages of proceedings before the Internal
Revenue Service, including audits, appeals, and collections, and Tax Court and district
court litigation. Mr. Lee also has experience in conducting corporate internal
investigations and advising clients as to corporate compliance issues involving the
Bank Secrecy Act, the USA Patriot Act, FATCA, and anti-money laundering laws and
Mr. Lee has represented both corporations and individuals in criminal investigations
involving tax, money laundering, health care, securities, public corruption, and fraud
offenses, and has significant experience in handling all stages of federal litigation
including trials and appeals.
Mr. Lee is the author of Foreign Account Tax Compliance Act Answer Book 2015
(Practising Law Institute).
Jeffrey M. Rosenfeld
Jeffrey Rosenfeld concentrates his practice in the area of business tax law.
Mr. Rosenfeld has significant experience counseling corporate clients and
individuals regarding undeclared foreign bank accounts, including “FBAR”
reporting obligations, and has represented numerous clients in the Internal
Revenue Service’s Offshore Voluntary Disclosure Program. Mr. Rosenfeld
frequently writes on issues related to the FBAR and FATCA rules and
regulations and international tax compliance issues.
Jeffrey M. Rosenfeld
Blank Rome LLP
[email protected]
Mr. Rosenfeld also counsels public and private corporations, partnerships,
and individuals in a broad array of tax matters including:
– domestic and international tax matters;
– state and local tax planning;
– tax-efficient structuring of domestic and international mergers,
acquisitions, divestitures,
– reorganizations, spin-offs, redemptions and liquidations;
– formation, operation and acquisition of Subchapter S Corporations,
partnerships and limited liability companies;
– federal, state, and local criminal and civil tax controversies, including
audits, administrative appeals, and litigation; and,
– issuances of equity-based compensation.
Obligation to Report Worldwide Income
 United States law has always obligated U.S. citizens (including dual
citizens) and U.S. residents to declare and pay taxes on all of their
worldwide income, regardless of where those earnings have been
 Historically, some U.S. taxpayers have attempted to avoid or evade
reporting income earned outside of the U.S. because of the U.S.
government’s inability to identify those earnings from overseas
banks and other financial institutions.
Why the Focus on
International Tax Compliance?
 IRS/DOJ have intense focus on curtailing offshore tax avoidance
 U.S. Tax Gap: $450 billion
 U.S. Senate PSI Report (2/26/14): Offshore tax schemes cause
$150 billion in lost tax revenue per year
 How?
 Using “carrot and stick” approach
The Carrot: Voluntary Disclosure Programs
 2014 Offshore Voluntary Disclosure Program (OVDP) which follows
highly successful 2009, 2011, and 2012 amnesty programs
 Provides participating taxpayers with amnesty from criminal
prosecution by filing of amended tax returns and payment of
taxes, interest, and penalties
 54,000 voluntary disclosures since 2009 (versus 100 annually
under traditional voluntary disclosure program)
 Over $8 billion in additional revenue collected to date
 Streamlined Filing Compliance Procedures for non-willful taxpayers
The Stick: Unprecedented Enforcement
 “Those who underestimate the ability of the United States to pursue
offshore tax evasion do so at their own peril.” (DOJ Tax January 29, 2016)
 “Today’s agreements reflect the Tax Division’s continued progress towards
reaching appropriate resolutions with the banks that self-reported and
voluntarily entered the Swiss Bank Program. The department is currently
investigating accountholders, bank employees, and other facilitators and
institutions based on information supplied by various sources, including the
banks participating in this Program. Our message is clear – there is no safe
haven.” (DOJ Tax May 29, 2015)
 “These four additional bank agreements signal a change in terrain for
offshore banking. No longer is it safe to hide money offshore and expect
that it will not be discovered. ‎IRS CI Special Agents will continue to follow
the money to find those who circumvent the offshore disclosure laws and
hold them accountable.” (IRS-CI May 29, 2015)
Enforcement Efforts to Date
 UBS Deferred Prosecution Agreement (Feb. 2009)
 Approximately 117 individual account holders have been criminally
charged to date
 90 guilty pleas
 12 convictions following trial
 5 fugitives from justice
 More than 50 “facilitators” have been charged
 12 guilty pleas
 2 convictions following trial
 23 fugitives from justice
Enforcement Actions Against Banks
 Bank Leumi (Israel) – December 2014; deferred prosecution
agreement. $270 million penalty and turnover of more than 1,500
names of account holders.
 Credit Suisse (Switzerland) – May 2014; guilty plea. $2.6 billion
 LLB-Vaduz (Liechtenstein) – July 2013; non-prosecution agreement.
$23 million penalty.
 Wegelin Bank (Switzerland) – January 2013; guilty plea. $58 penalty
and $16.2 forfeiture.
Use of “John Doe” Summonses
 Used to obtain information about U.S. taxpayers through
correspondent accounts
 To date, such summonses have been issued for bank account
information in Switzerland, India, the Bahamas, Barbados, Belize, the
Cayman Islands, Guernsey, Hong Kong, Malta, and the United
Swiss Bank Program
 More than 100 Swiss Banks enrolled as of December 31, 2013
 80 Swiss banks reached resolutions with U.S. government as of January
 Over $1.3 billion in penalties paid by participating banks
 In exchange for non-prosecution agreement, participating banks:
 made a complete disclosure of their cross-border activities,
 provided detailed information on accounts in which U.S. taxpayers
have a direct or indirect interest,
 are cooperating in treaty requests for account information
 are providing detailed information as to other banks that transferred
funds into secret accounts or that accepted funds when secret
accounts were closed
 must cooperate in any related criminal and civil proceedings
 pay financial penalty, which could be mitigated with proof that the
U.S. taxpayer declared the account or the U.S. taxpayer came into a
voluntary disclosure program at the bank’s urging.
United States v. Zwerner Jury Verdict
May 28, 2014
 Zwerner failed to file FBARs for Swiss bank account with balance of
$1.4 million
 Jury found Zwerner liable for willfully failing to file FBARs for 2004,
2005, and 2006
 Potential penalty: 50% of balance of account for each year (total
150% penalty)
 Even though he filled out a tax organizer provided by his accountant,
every year, Zwerner answered “no” to questions asking whether
“you have an interest in or signature authority over a financial
account in a foreign country, such as a bank account, securities
account or other financial account” and whether “you have any
foreign income or pay any foreign taxes.”
FATCA and the End of Tax Havens & Banking Secrecy
 Anti-tax evasion law passed by Congress in 2010
 Became fully effective July 1, 2014
 Requires foreign financial institutions (FFIs) to annually disclose
account information regarding U.S. customers or face 30%
withholding tax/penalty on U.S.-source payments
 Despite some initial controversy, FATCA has been largely embraced
 More than 165,000 FFIs have registered with IRS to become “FATCAcompliant”
 More than 110 countries have agreed to bi-lateral treaties (IGAs) to
fully implement FATCA
United States v. Robert Bandfield
• Superseding Indictment filed July 31, 2015 (E.D.N.Y)
• Individuals and offshore entities charged with securities fraud
and money laundering involving an offshore “pump and
dump” securities scheme
• Paragraph 21 of indictment alleges that the defendant
“defraud[ed] the United States by impeding, impairing,
obstructing and defeating the lawful governmental functions
of the IRS in the ascertainment, computation, assessment and
collection of revenue, specifically federal income taxes under,
inter alia, FATCA; and . . . laundering money by facilitating
financial transactions to and from the United States, which
transactions involve proceeds of fraud in the sale of
U.S. v. Bandfield, continued
• Undercover operation where an undercover agent from the
United States was able to obtain formation of offshore
international business corporations;
• Paragraph 28 alleges that one of the defendants suggested to
the undercover agent that he could circumvent “the IRS’s
reporting requirements by having a nominee sign IRS Forms
W-8BEN for the Undercover Agent’s IBCs and LLCs.”
• Paragraph 30 alleges that one defendant reported to the
undercover agent that a corporate structure, i.e. “this ‘slick’
structure was designed to counter U.S. President Barack
Obama’s new laws, a reference to FATCA.”
Civil Enforcement Efforts
 Required records doctrine
 DOJ has successfully challenged motions to quash grand jury
subpoenas in criminal cases and obtained orders enforcing
summonses in civil cases.
 “At this point, the message is clear: taxpayers are required to
maintain foreign records and produce them upon request.”
 Civil audits of individual taxpayers with offshore assets
 Unreported income from offshore accounts/assets
 Other information returns (3520, 3520-A, 5471, etc.)
What’s Next?
 DOJ and IRS mining data provided from multiple sources:
 Swiss Bank Program
 Grand jury subpoenas and John Doe summonses
 Treaty requests
 Whistleblowers
 Cooperators
 FATCA reporting
 DOJ and IRS following leads in many countries:
 Belize, the British Virgin Islands, the Cayman Islands, the Cook
Islands, India, Israel, Liechtenstein, Luxembourg, the Marshall
Islands, Panama, and others
The Panama Papers
 Unprecedented leak of 11.5m files from the database of the world’s fourth
biggest offshore law firm, Mossack Fonseca.
 Searchable database containing information on more than 200,000
offshore entities that are part of the “Panama Papers” investigation.
 The database is believed to be the largest ever release of records
regarding the creation and maintenance of secret offshore companies and
the identities of the individuals behind those companies.
 According to ICIJ, includes information about companies, trusts,
foundations and funds incorporated in 21 tax havens, from Hong Kong to
Nevada in the United States and links to people in more than 200
countries and territories.
 The database offers an unprecedented window into the previously-secret
world of offshore tax evasion and the use of shell or nominee entities to
conceal the identity of the real owner of the underlying assets.
 12 national leaders including monarchs, presidents and prime
ministers have been using offshore tax havens.
 140 offshore firms named in the documents are connected to
politicians or public officials and their families.
 A $2bn trail leads all the way to Vladimir Putin. The Russian
president’s best friend – a cellist called Sergei Roldugin - is at the
centre of a scheme in which money from Russian state banks is
hidden offshore. Some of it ends up in a ski resort where in 2013
Putin’s daughter Katerina got married.
 Among national leaders with offshore wealth are Nawaz Sharif,
Pakistan’s prime minister; Ayad Allawi, ex-interim prime minister
and former vice-president of Iraq; Petro Poroshenko, president of
Ukraine; Alaa Mubarak, son of Egypt’s former president; and the
prime minister of Iceland, Sigmundur Davíð Gunnlaugsson.
 An offshore investment fund run by the father of former British
prime minister David Cameron avoided ever having to pay tax in
Britain by hiring a small army of Bahamas residents to sign its
paperwork. The fund has been registered with HM Revenue and
Customs since its inception and has filed detailed tax returns every
 In the UK, six members of the House of Lords, three former Conservative MPs and
dozens of donors to British political parties have had offshore assets.
 The families of at least eight current and former members of China’s supreme
ruling body, the politburo, have been found to have hidden wealth offshore.
 Twenty-three individuals who have had sanctions imposed on them for supporting
the regimes in North Korea, Zimbabwe, Russia, Iran and Syria have been clients of
Mossack Fonseca. Their companies were harboured by the Seychelles, the British
Virgin Islands, Panama and other jurisdictions.
 A key member of Fifa’s powerful ethics committee, which is supposed to be
spearheading reform at world football’s scandal-hit governing body, acted as a
lawyer for individuals and companies recently charged with bribery and
 One leaked memorandum from a partner of Mossack Fonseca said: “Ninety-five
per cent of our work coincidentally consists in selling vehicles to avoid taxes.”
U.S. Highlights
 At least 36 U.S. persons implicated
More importantly: Anyone with
unreported Panama accounts (whether
in the Panama Papers or not) likely to
face increased pressure to come back
into compliance.
The U.S. Response
 Justice Department opened a criminal investigation into the
offshore tax schemes believed to be exposed by the Panama Papers
 New York’s Department of Financial Services has ordered 13 foreign
banks to turn over records regarding their dealings with the
Mossack Fonseca firm.
 Obama Administration announced significant steps to crack down
on money laundering, corruption, and tax evasion in the wake of
the Panama Papers leak, and called upon Congress to quickly act to
pass legislation addressing these issues.
The U.S. Response (continued)
 In particular, the White House announced the following:
 New rules to increase transparency and disclosure requirements that will
enhance law enforcement’s ability to detect, deter, and disrupt money
laundering, terrorist financing, and tax evasion, including long-awaited final
regulations on “Customer Due Diligence” that require financial institutions to
know and keep records on who actually owns the companies that use their
 New regulations that expand upon existing law by adopting “Customer Due
Diligence” requirements for certain prepaid credit and debit cards;
 New rules that close a loophole allowing foreigners to hide assets or financial
activity behind anonymous entities established in the United States; and
 New legislation that would increase transparency into the “beneficial
ownership” of companies formed in the United States by requiring that
companies know and report their true owners.
 The Obama Administration also called upon the Senate to finally approve tax
treaties that have been pending for several years that would help crack down on
offshore tax evasion.
Foreign Asset Reporting
Foreign Bank Accounting Reporting
 Required as part of Bank Secrecy Act since 1970s
 U.S. taxpayers with foreign accounts have two obligations
 Answer question “yes” on Form 1040, Schedule B, Part III (due
April 15 or due date of extended return) or other applicable tax
 Electronically File FinCEN 114, Report of Foreign Bank and
Financial Accounts (“FBAR”) (due June 30)
Breaking News:
Modified FBAR Filing Deadlines
 Due June 30 for all taxpayers
 For 2015, FBAR is due June 30, 2016
 No extensions permitted
 Starting 2016 tax year, due April 15
 New law, enacted early August 2015
 For 2016, FBAR is due April 15, 2017
 Now, eligible for six-month extension – to October 15
 Expect regulations on how to request an extension
FATCA Also Requires Reporting of Foreign Assets by U.S.
 U.S. taxpayers with “specified foreign financial assets” that exceed
certain thresholds must now report those assets to the IRS.
 A specified foreign financial asset includes (1) financial accounts
maintained by foreign financial institutions and (2) other foreign
financial assets held for investment such as foreign stocks or
securities, interests in a foreign entity, any financial instrument or
contract that has as an issuer or counterparty that is other than a
U.S. person, foreign pensions and deferred compensation plans, and
certain foreign trusts and estates
 Form 8938, “Statement of Foreign Financial Assets,” must be filed
with the tax return.
Options for U.S. Taxpayers with
Undisclosed Foreign Assets
Option 1 – Streamlined Domestic Offshore Procedures
 Penalty of 5%.
 Look back period of three years for amended returns and six years for
 Penalty is on assets which are reportable on FBAR or Form 8938 during the
relevant lookback period.
 Includes value of foreign bank accounts, foreign securities accounts,
foreign stock, etc.
 Does not include signature authority accounts or assets not
reportable on FBAR or 8938 (e.g., income producing real estate).
 Best Option For:
 U.S. residents for last three years; and
 Filed U.S. income tax returns last three years; and
 Need to pick up taxable income on an amended return from a foreign
asset; and
 Needs to file an FBAR, 8938 or other information return; and
 Acted non-willfully.
How to Determine Willfulness
Unreported income in the offshore account;
Use of structure/entity to hold offshore account;
Use of non-U.S. identification to open account;
Checking the box “no” on Schedule B;
Failing to advise return preparer of existence of offshore account;
Transferring offshore funds to another institution or safe deposit box
to avoid detection;
 Sophistication of taxpayer;
 Hold mail instruction;
 Willful blindness to tax/FBAR reporting obligations.
Required Certification of Non-Willfulness
 “My failure to report all income, pay all tax, and submit all required
information returns, including FBARs, was due to non-willful
conduct. I understand that non-wilful conduct is conduct that is due
to negligence, inadvertence, or mistake or conduct that is the result
of a good faith misunderstanding of the requirements of the law.”
 “I recognize that if the Internal Revenue Service receives or discovers
evidence of wilfulness, fraud, or criminal conduct, it may open an
examination or investigation that could lead to civil fraud penalties,
FBAR penalties, information return penalties, or even referral to
Criminal Investigation.”
 “Under penalties of perjury, I declare that I have examined this
certification and all accompanying schedules and statements, and to
the best of my knowledge and belief, they are true, correct, and
Option 2 – Streamlined Foreign Offshore Procedures
 No Penalty.
 Look back period of three years for amended returns and six years
for FBARs.
 Best Option For:
 U.S. taxpayer who was a non-resident for one of the last three
years; and
 Needs to pick up taxable income on an amended return from a
foreign asset; and
 Needs to file an FBAR, 8938 or other information return; and
 Acted non-willfully.
OPTION 3 – Offshore Voluntary Disclosure Program
 Penalty between 27.5% and 50% - depends on where the
taxpayer banked and whether the taxpayer acted willfully.
 Look back period of 8 years.
 Penalty is on non-compliant assets (e.g., foreign accounts,
income producing real estate, artwork purchased with funds
escaping U.S. taxation, foreign businesses, etc.)
 Best Option for:
 Willful taxpayers with “bad facts”.
 FBARs and information returns not filed.
 Significant taxable income to pick up.
OVDP – 50% Penalty
50% penalty in OVDP if foreign financial institution is:
 (1) under investigation by the IRS or Department of
 (2) cooperating with the IRS or Department of Justice in
connection with accounts beneficially owned by a U.S.
person, or
 (3) has been identified in a court-approved issuance of a
summons seeking information about U.S. taxpayers who
may hold financial accounts (a “John Doe summons”) at
the foreign financial institution
Foreign Banks/Facilitators
Under Investigation
Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
Wegelin & Co.
Liechtensteinische Landesbank AG
Zurcher Kantonalbank
swisspartners Investment Network AG, swisspartners Wealth Management AG,
swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
 CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and
 Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust
Company, Ltd.
 The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
Foreign Bank/Facilitators
Under Investigation (continued)
 The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank
of Butterfield), its predecessors, subsidiaries, and affiliates
 Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates
(effective 12/19/14)
 Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi
(Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective
Foreign Bank/Facilitators
Under Investigation (continued)
 From March 2015 to present, over 75 Swiss banks have entered into nonprosecution agreements with the Justice Department for engaging in
business activities that assisted U.S. taxpayers to violate U.S. tax laws
 As each Swiss bank entered into resolutions, also paid penalty to the U.S.
based upon the facts and circumstances for each bank.
 Now totals over $1 billion
 The full list of Swiss banks can be found here:
 Examples:
 Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
 Standard Chartered Bank (Switzerland) SA (effective 11/13/15)
 BNP Paribas (Suisse) SA (effective 11/19/15)
 Deutsche Bank (Swiss) SA (effective 11/24/15)
OPTION 4 - Delinquent FBAR
Submission Procedures
 No Penalty
 No designated look back period; recommended to file 6 years of FBARs.
 To use this procedure, taxpayers should file the delinquent FBARs according to the FBAR
instructions and include a statement explaining why the FBARs are filed late.
 Designed for taxpayers who picked up all income but failed to file FBARs.
 FBARs will not be automatically subject to audit but may be selected for audit through
the existing audit selection processes that are in place for any tax or information returns.
 Best option for:
 Taxpayer properly reported on U.S. tax returns, and paid all tax on,
the income from the foreign financial accounts reported on the
delinquent FBARs; and
 Taxpayer has not previously been contacted regarding an income tax
examination or a request for delinquent returns for the years for
which the delinquent FBARs are submitted; and
 Taxpayers have no taxable income that is required to be picked up on
an amended return.
OPTION 5 - Delinquent International Information
Return Submission Procedures
 No penalty
 No designated look back period; recommended look back period will depend on the
facts and circumstances of the case.
 Designed for taxpayers who have reported all foreign income, but failed to file
certain international information returns.
 Best option for:
 Taxpayer properly reported on U.S. tax returns, and paid all tax
on, most or all foreign income; and
 Taxpayer has not previously been contacted regarding an
income tax examination or a request for delinquent
information returns; and
 No FBARS to file.
 Subject to penalties on failing to file FBARs, 8938s and other
information returns
 Non-willful up to $10,000 per account per year for FBAR.
5471 and 8938 have separate penalties as well.
 Willful penalty up to 50% of account value per year. See
 No designated look back period; recommended look back
period will depend on the facts and circumstances of the case.
 Best option for:
 Highly fact dependent, and only occasionally
recommended. Certainly the taxpayer will need to have
acted non-willfully.
Risks of “Quiet Disclosure”
 FAQ 15: “Taxpayers are strongly encouraged to come forward under the
OVDP to make timely, accurate, and complete disclosures. Those taxpayers
making ‘quiet’ disclosures should be aware of the risk of being examined
and potentially criminally prosecuted for all applicable years.”
 FAQ 16: “The IRS is reviewing amended returns and could select any
amended return for examination. The IRS has identified, and will continue
to identify, amended tax returns reporting increases in income. The IRS will
closely review these returns to determine whether enforcement action is
appropriate. If a return is selected for examination, the 27.5 percent
offshore penalty would not be available. When criminal behavior is evident
and the disclosure does not meet the requirements of a voluntary
disclosure under IRM, the IRS may recommend criminal
prosecution to the Department of Justice.”
 Note: United States v. Michael A. Schiavo (D. Mass. 2011)
 See FATCA and Panama Papers Discussion.
 Rarely, if ever, a good idea.
 Matthew D. Lee
 [email protected]
 (215) 299-2765
 Jeffrey M. Rosenfeld
 [email protected]
 (215) 569-5752